Underwater Mortgages Fall to 20% to End 2013

The national negative equity rate dipped beneath 20% for the first time in years to finish out 2013, according to Zillow’s fourth quarter Negative Equity Report.

Falling to 19.4% in last year’s fourth quarter, negative equity is now a third less than its 31.4% peak in the first quarter of 2012.

With home values rising across the country, negative equity has decreased for seven consecutive quarters, according to Zillow. As a result, almost 4 million homeowners are no longer considered to be “underwater” on their mortgages, owing more than what their home is worth. 

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Not only did the negative equity rate improve on an annual basis from 27.5% in the fourth quarter of 2012, it also dropped from the third quarter’s 21%, Zillow notes. 

However, there are still more than 9.8 million homeowners with underwater mortgages, and the national “effective negative equity rate” (where the loan-to-value is above 80%) of nearly 38% still makes it difficult for homeowners to afford a down payment on another home. 

“While not all of these homeowners are underwriter, they have relatively little equity in their homes, and therefore selling and buying a new home while covering all of the associated costs (real estate agent fees, closing costs and a new down payment) would be difficult,” says Zillow. 

Looking at all homeowners, including the approximately one-third who own their homes outright, 13.7% are underwater. 

Last year was a good year for regaining some of the home value losses homeowners experienced thanks to the housing bust, says Zillow, which translated to a good year for reducing negative equity. 

“Some of the hardest-hit markets during the housing bust have been showing the highest rates of home value appreciation and have also worked down large amounts of negative equity,” Zillow says, citing Sacramento as an example. The California capitol halved its negative equity from 41.7% to 20.5% in 2013. 

Other markets with high levels of home value appreciation in December include Las Vegas (up 28.1%), Riverside (up 28%), and Detroit (21%). These markets also saw negative equity rates decline on a quarterly basis, says Zillow. 

The negative equity rate among all homeowners with a mortgage will fall to at least 17.2% by the fourth quarter of 2014, predicts the Zillow Negative Equity Forecast. While that’s a conservative estimate, it adds, negative equity will remain across the nation “for the foreseeable future,” especially in hard-hit markets, as the housing recovery slows. 

“2014 will see a lot more moderation,” says Zillow. “Home value appreciation will continue to decline, negative equity rates will also decline, albeit at lower speeds, and inventory will continue to rise.” 

Access Zillow’s fourth quarter Negative Equity Report. 

Written by Alyssa Gerace

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